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Economists lower forecasts for US growth

Christopher S. Rugaber AP Economics Writer

Updated:
07/11/2014 11:44:29 AM EDT

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FILE - In this Friday, Nov. 23, 2012 file photo, a cashier rings up a sale at a Sears store, in Las Vegas. U.S. business economists have sharply cut their growth forecasts for the April-June quarter and 2014, though they remain optimistic that the economy will rebound from a dismal first quarter. (AP Photo/Julie Jacobson, File)

WASHINGTON (AP) — U.S. business economists have sharply cut their growth forecasts for the April-June quarter and 2014, though they remain optimistic that the economy will rebound from a dismal first quarter.

The average forecast for growth in the second quarter has fallen to 3 percent, according to a survey released Friday by the National Association for Business Economics. That's down from 3.5 percent in a June survey. Growth in 2014 as a whole will be just 1.6 percent, they project, sharply below a previous forecast of 2.5 percent. If accurate, this year's growth would be the weakest since the Great Recession.

The lower 2014 forecast largely reflects the impact of a sharp contraction in the first quarter. The economy shrank 2.9 percent at an annual rate, the biggest drop in five years. That decline will weigh heavily on the economy this year, even if growth resumes and stays at 3 percent or above, as most economists expect.

The economists reduced their second-quarter forecast largely because they expect consumers spent at a much more modest pace. They now expect spending will grow just 2.3 percent at an annual rate in the second quarter, down from a 2.9 percent estimate in June. Spending rose just 1 percent in the first quarter, the smallest increase in four years, a sign consumers are still reluctant to spend freely.

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Many retail chains are feeling the pain. The Container Store said Tuesday that sales at stores open for at least a year slipped 0.8 percent in the first quarter.

"We are experiencing a retail 'funk'," Kip Tindell, chief executive of The Container Store, said Tuesday. "While consumers are buying homes and automobiles and even high ticket furniture, most segments of retail are, like us, seeing more challenging sales than we had hoped early in 2014."

Family Dollar Stores and clothing retailer the Gap also reported lower sales this week.

Another factor weighed heavily on the first quarter: A big drop in exports widened the nation's trade deficit and accounted for about half the contraction. Exports picked up in May and trade is unlikely to be as big a drag in the second quarter. But the NABE survey found that economists expect exports will now rise just 2.5 percent this year, down from June's estimate of 3 percent. The weaker figures reflect sluggish economies in Europe and slower growth in China.

The NABE did a special survey after the government announced the dismal figures at the end of June. The group typically surveys economists quarterly.

Despite the downgrades, the survey underscores that economists are mostly optimistic about the rest of this year. Analysts largely blame the first quarter shrinkage on temporary factors, such as harsh winter weather and a sharp slowdown in inventory restocking. When companies restock their inventories at a weaker pace, it slows demand for factory goods and lowers production.

Jack Kleinhenz, president of the association and chief economist at the National Retail Federation, said that most other recent economic data, particularly regarding hiring, has been positive. Employers have added an average of 230,000 jobs a month this year, one of the best stretches since the recession.

In addition, consumers are more confident and government spending cuts and tax increases are exerting less of a drag. In 2013, a Social Security tax cut expired and government spending cuts were implemented. The combined effects slowed growth by 1.5 percentage points, economists estimate.

"Many of the fundamentals are there for growth," Kleinhenz said.

As a result, the 50 economists who responded to the survey see the chances of a recession this year or next as pretty low. Sixty percent said the odds were 10 percent or lower, and more than 90 percent said they were 25 percent or lower.